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Blue Cross Loses Its State Tax Exemption in California

Little Rock The state of California in an unusual and precedent setting move withdrew the state tax exempt status of Blue Cross Blue Shield of California. The Los Angeles Times said they did so “quietly,” but trust me on this one, their action will reverberate with a loud roar throughout the soft chairs and well-appointed executive suites of highly paid, supposedly nonprofit hospital and insurance executives all around the country. In the short term, barring appeals, this will cost the Blues tens of millions of years in state tax payments in California. In the long term this may toughen the backbones of many state tax authorities and the IRS, now charged with regularly assessing the charitable contributions of nonprofit hospitals, to finally separate the herd, making the wolves in sheep’s clothing who have for profit style hearts and pay stubs, either really be mission driven or really be all about the money.

God knows, the California Blues were asking for it! They had $4 billion in reserves. They had to be forced by the legislature to reveal the fact that their chief executive was being paid over $4 million per year in 2011 and 2012, and then still with impunity didn’t disclose his pay after that but simply said the top three executives all were paid over
$1 million per year. This was not a new problem for the Blues. Their reserves didn’t suddenly surge to $4 billion plus, but have been working their way up from $3 billion over the last couple of years. Incidentally, the level of their reserves was almost four times the industry recommendation for what any outfit might have possibly needed for any conceivable circumstance or calamity. In some ways in California this is a footnote in a long series of chapters where for profit practices operating with nonprofit protections have been scrutinized and questioned. One part of California’s Blue Cross operation had already been lopped off as for profit earlier, and with this movement by the California taxman, the company will have to put up or shut up on its charity obligations. The company’s earlier strategy had been to calf off $30 or $40 million to a separate foundation to handle their charitable obligations, but they must have missed the memo that to be tax exempt the whole operation has to be operating for charitable purposes not just a branch off the main trunk.

Are they alone? Hardly! Looking at the similar problem in nonprofit hospitals, our researchers would only nod at the Cali-Blues pay stubs. Certainly big nonpro hospital execs at outfits in Houston for example are making in the $4 and $5 million range. The Partners’ nonprofit hospital behemoth based in Boston lists a small army of executives making more than a million on their IRS 990. Children’s in Houston is over a billion dollar operation and even with its creative accounting only claims to spend $6 million in charity care, making the California Blue Cross look like a big spender. It goes on and on and on like this from city to city, state to state. Looking through our researchers’ spreadsheet you can’t tell what hits you first, the headache at reading all the big numbers, or the heartache at seeing how miserly the charity care continues to be.

As California just made clear, a day of reckoning is coming on the state level as desperate legislators have to balance their budgets and are less willing to pretend these slicksters can get away with being something they aren’t. These insurers and hospitals have to hear the footsteps of state and federal tax folks heading towards their doors now. The party is coming to an end. It’s time for them to pay the piper. Luckily, that means a better day for all of the rest of us!